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Investment Overview for Goldman Sachs (NYSE:GS)

WHAT HAS CHANGED?

Latest Earnings

In Q1 2020, Goldman’s revenues of $8.74 billion were on the same level as the year ago period. While the asset management revenues for the quarter were down to -$96 million as compared to the $1.79 billion in q1 2019, it was offset by growth in global markets due to higher trading activity and higher investment banking revenues.

Impact of coronavirus outbreak

Goldman Sachs’ stock has suffered as states and countries are on lockdown due to Coronavirus pandemic. Businesses are not investing, with a shift in focus from long-term to near-term survivability. On the same lines, there is a drop in consumer demand as people are refraining from discretionary expenditures. The economic downturn could cause significant losses for businesses and individuals alike, impacting their loan repayment capability. This could result in sizable losses for the bank, as it has a substantial loan portfolio of both consumer and commercial loans. Further, as the economic condition deteriorates, it would become expensive for the bank to attract funding, negatively impacting all its operations. Similarly, the lower market activity would mean a drop in investment banking as well as capital raising deals – resulting in a decline in advisory & underwriting fees. While the company reported no revenue growth in Q1 on a year-on year basis, we believe that Q2 will confirm this reality with a drop in revenues across all the segments.

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Below are key drivers of Goldman Sachs' value that present opportunities for upside or downside to the current Trefis price estimate for company's stock:

Bonds, Currencies & Commodities

Trading Assets for Bonds, Currencies & Commodities : Goldman's FICC operations have historically been its biggest source of revenue. The global bank grew its debt-trading capital from $205 billion at the end of 2005 to $293 billion by 2007. Following the global economic crisis, this figure fell to $246 billion in 2008 before recovering to $290 billion by 2012. But stricter capital requirements and weak debt market conditions over the second half of 2015 forced the figure lower to $174 billion by 2015. This figure improved over 2016-18 with 2016 reporting $180 billion followed by $203 billion and $264 billion in 2017 and 2018 respectively. We currently forecast a 2% growth in FICC trading assets going forward. However, if Goldman's optimism about the FICC industry proves right, then assets could grow by 4% annually, to reach $347 billion by the end of our forecast period. This represents an upside of 1% to the Trefis price estimate.

Yield on Trading Assets for Bonds, Currencies & Commodities: Goldman Sachs' FICC trading yields fell from above 5.5% in 2006-2007 to under 4% in 2008 before rebounding to 8.7% in 2009. Over 2013-16, the figure has largely remained around 4% - with the figure for 2015 being unusually elevated despite a year-on-year decline in revenues due to considerable devaluation in the debt trading portfolio. Further, it reduced significantly in subsequent years from 4.1% in 2016 to 2.2% in 2018. We expect yield figures to remain around 2.15% for the Trefis forecast period. However, if Goldman's FICC trading yields fall below 1.5% due to poor currency trade run, this could present a 4% downside to the Trefis price estimate.

For additional details, select a driver above or select a division from the interactive Trefis split for Goldman Sachs at the top of the company page.

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Goldman Sachs is a leading global financial services firm with offices in over 30 countries. The company offers investment banking, securities and investment management services to corporate, institutional, government and high-net worth individual clients.

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Yields For Equity Trading Business Well Above FICC Trading Yields

The average yield for Goldman's equity trading business over the period 2014-18 has been 6.6% - compared to a figure of 3.5% for the FICC business over the same period. As a result, equity trading revenues were 29% more than FICC revenues in 2018, despite the equity trading desk being just one-thirds the size of the FICC trading unit in terms of trading portfolio size.

Growing Asset Management Business

Goldman's assets under management (AUM) have seen significant growth over the last decade, as the banking giant looks for ways to improve profitability even as its cornerstone trading business remains prone to high volatility. Goldman will likely have to focus more on its asset management business as new regulations begin to restrict proprietary trading and risk taking, which is why we see the division as a significant value driver for the company. In fact, the bank is also pushing its online loans-and-deposits services in a bid to diversify its presence in the U.S. financial services space.

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Increasing Demand for Investment Banking Services in Emerging Markets

With the GDP of many emerging markets such as China and Brazil growing rapidly, there is an increasing demand for capital from companies in these markets to support expansion. Additionally, with the integration of these markets into the global economy, there is a shift in these countries from family-run businesses to global corporations. Accordingly there is an increasing number of companies going public or raising debt capital, driving demand for equity underwriting and debt origination services. Consolidation across different sectors has also been driving demand for M&A advisory services.

Dominant position in investment banking

Goldman Sachs is a leader in the global investment banking space, with the bank ranking among top three in the global M&A industry for nearly every single quarter over the last decade.

Volcker Rule Has Affected Trading Revenues

The Volcker Rule restricts banks from making certain kinds of speculative investments if they are not on behalf of their customers. Goldman's proprietary trading desks accounted for a sizable percentage of earnings before the downturn, and the Volcker Rule put a complete stop on these revenues. Although the Trump administration can potentially dilute the Volcker rule restrictions, the timing and effectiveness of proposed changes remains to be seen.

Economic Recovery Should Stimulate the Asset Management Industry

Investors' desire to regain losses that came during the recession could stimulate investments in multi-asset, alternative and equity products, while signs of a broad based recovery in the real estate market would improve prospects in alternative investments.

Long-term trends, including the ongoing shift from state pension dependency to private retirement funding, aging populations in mature markets, and growing wealth in emerging economies, will also positively impact assets under management.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.

We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

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